I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

The European Union's Incredibly Silly New Rules On High Frequency Trading

I’ve just spotted something in the European Union’s new rules governing high frequency trading which is just incredibly silly. For this one little rule change obviates all of the benefits that HFT can bring without actually stopping anyone doing HFT or profiting from having done so. That is, we get all of the bad effects of HFT, whatever you might happen to think they are, without getting the one thing that almost everyone agrees is a good thing.

The curbs are part of revamped EU markets legislation ranging from commodity derivatives speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.

It’s that “increments too small” bit that makes the rules something that come close to insanity. For small increments are exactly what we actually want in a market. In fact, we’d like them to be so small that they actually vanish. So there must be a reason why an entire continent is condemned to a rule quite so odd and I think I’ve found it. The MEP who actually shepherded the new trading regulations through the European Parliament was Sven Giegold, a German Green MEP. Oddly, I’m on his mailing list for some reason I’m not sure of and every time I receive one of his missives I rather wonder at the world view that produces such appalling misunderstandings of matters economic. And here is Geigold explaining the point at his website:

High frequency trading

Tick size regime: The smallest change by which a price of an investment product on a trading venue will be able to alter (tick) will be regulated. Smaller ticks increase the possibility for high frequency trading strategies to create revenues.

This isn’t something that came about by happenstance, this was deliberately planned. And that’s what makes it so difficult to understand.

For the one thing that everyone agrees has been happening that is of benefit to each and every investor is that tick sizes (also known as the bid/ask spread) have been declining in recent decades. And we also know what has been causing that decline, the greater liquidity happening as a result of HFT and similar techniques.

Just to explain why this is important: that tick, that bid/ask spread, is the fee that we investors pay to the market professionals for being able to buy and sell. We cannot buy Microsoft and sell Microsoft at $40 at the same moment. We can buy at perhaps $40.05 and sell at $39.95 at any one point. That 10 cents being what we’re forking over to feed all those people running the markets and exchanges and so on (there are other fees as well of course). So, a reduction in that tick means a reduction in what it costs us to save for our pensions.

The reduction in the bid/ask spread has been substantial too. From around 0.2% of transaction size in the mid-1990s to perhaps 0.002% today. A reduction of two orders of magnitude. That’s an awful lot of money that has been saved by us investors over that time.

But look what Giegold has just ushered through the European Parliament: he’s insisting that tick size must increase. We must all be paying more to save for our pensions. And all because he’s worried that some HFT trader might make a profit. Which is absolutely ludicrous, of course. We don’t care whether HFT traders make a profit or not, we also don’t care whether the more archaic market makers do. We only care about the cost of investing our pensions funds. And, since the presence of HFT pushes down the tick then we benefit from HFT.

But they’ve just passed a law insisting that we and our pensions cannot, no really cannot by law, benefit from all of this. Do you see why I describe this law as being incredibly silly?

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